A Simple Calibration Procedure of Stochastic Volatility Models with Jumps by Short Term Asymptotics

Alexey Medvedev and Olivier Scaillet
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Alexey Medvedev: HEC-University of Geneva and FAME

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: In this paper we propose a simple non-parametric calibration procedure of option prices based on the short term asymptotics of implied volatilities. The approximation formula is derived for a general one factor jump-diffusion specification nesting most of the theoretical models typically used for option pricing. Using sets of reasonable parameter values we show that the procedure is capable of producing accurate estimates of key model functional relationships. Its implementation on a set of S&P500 option price data yields two major empirical results. First, the square root process for the variance is not consistent with the data. Second, Poisson jumps in returns do not help explaining the skew of short term implied volatilities.

Keywords: Option pricing; stochastic volatility; asymptotic approximation; jump-diffusion (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2004-10
New Economics Papers: this item is included in nep-ets and nep-fin
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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